I’d be nervous if I were a shareholder of Verizon Communications Inc. (NYSE:VZ) at the moment. VZ stock is down just over 3% in the past month, extending a 20% decline since early January. That’s a significant fall for what should be a “safe”, dividend-paying stock.
That decline could get larger on Thursday when Verizon is the third of the four major U.S. wireless providers to report second-quarter earnings. The first two both posted strong quarters. In some industries, that strength might read well across to Verizon earnings, and boost the chance of a beat that will spike VZ stock.
But in the U.S. wireless business at the moment, I’m skeptical that’s the case. And with little real help likely from the rest of its business, VZ stock could be in for a tough session.
VZ Stock Is Struggling
Shares of both VZ and AT&T Inc. (NYSE:T) have struggled over the past couple of months. Competition is the most obvious culprit. Sprint Corp (NYSE:S) has become extremely aggressive in its promotional efforts, and directly targeted Verizon in the process. As a result, VZ has had to again offer unlimited data — a move that could potentially hurt margins.
Fears of that compression have weighed on Verizon stock. But recent reports from competitors might seem like good news. AT&T beat earnings expectations and added nearly 3 million subscribers, better than estimates. T-Mobile US Inc (NASDAQ:TMUS) crushed profit estimates and raised its guidance for subscriber additions.
Again, that might seem like good news for Verizon, implying that margin pressures are manageable and that the industry is growing. But that is unlikely to be the case.
Good for AT&T, (Probably) Bad for Verizon
The margin weakness being priced in at the moment isn’t necessarily supposed to show up in Q2 numbers. Sprint’s most recent promotion didn’t even hit until June.
And as far as subscribers go, the industry really isn’t growing. There simply aren’t many new customers in the U.S. left to sign up. Rather, the four major carriers are fighting among themselves for the existing customer base. If both AT&T and T-Mobile are adding subscribers, they’re most likely coming at the expense of either Verizon and/or Sprint.
That “and/or” is important for VZ stock. Is it possible Verizon will win, and Sprint will lose? Possible, yes, but not likely.
It’s Sprint that’s leading with the most aggressive promotions. It’s Sprint that has grown its base consistently of late, while Verizon lost customers in its first quarter. If those trends continue, Q2 subscriber numbers could be ugly for Verizon. And that will be a big problem for VZ stock.
Verizon Stock Lacks A Driver
If the subscriber numbers disappoint, the narrative surrounding VZ stock can turn very bearish.
Verizon doesn’t have the business-facing revenue that T does, which somewhat diversifies that rival away from wireless. Instead, Verizon has a wireline business in surprising decline. The $4 billion acquisition of AOL doesn’t move the needle against the $180 billion market capitalization of Verizon stock. And the Yahoo acquisition closed less than three weeks before the quarter ended, limiting its impact.
That means subscribers are the key number in the Verizon earnings report. And if Verizon misses, then VZ stock is sitting on a combination of declining subscribers and compressed margins with little in the rest of the business to offset that profit erosion.
In that outcome, the recent pressure on Verizon stock could intensify.
And that very much seems a likely outcome on Thursday. The last couple of months have been rough for Verizon stock. That seems unlikely to change after Q2 earnings.
As of this writing, Vince Martin has no positions in any securities mentioned.